Rethinking the Relationship between International Trade ... · 9/25/2014 · Forum of International Development Studies. 45―4 (Mar. 2015) 63 Rethinking the Relationship between

Rethinking the Relationship between International Trade and Environment:

Thailand as a Case Study

Panisa VISHUPHONG

Forum of International Development Studies. 45―4 (Mar. 2015)

63

Rethinking the Relationship between International Trade and Environment:

Thailand as a Case Study

Panisa VISHUPHONG*

Abstract

　 Theoretically, international trade raises questions about environmental impact, especially in

developing countries. Thailand has used trade policy as an instrument for boosting economic growth.

Trade expansion may induce an environmental degradation in Thailand. This study employs the

Computable General Equilibrium (CGE) analysis to measure the impacts of trade reforms on the

environment of Thailand. Results show that trade reform is good for economic growth but not favorable

to the environment. An environmental regulation should be concerned with mitigating environmental

degradation. A combined policy between trade reform and moderate environmental tax is a favorable

solution both for economic and environment. However, the policy should be enforced with adequate

consideration. Too strict environmental policy may lead to economic contraction.

Keywords: International Trade, Environment, Thailand

1. Introduction

1.1. International Trade and the Environment

　 Theoretically, international trade enlarges markets and enhances the efficiency of resource

allocation, which in turn boosts economic growth. Other benefits such as poverty reduction and

income distribution improvement are also often experienced. As a result, many countries promote

trade policies, particularly free trade, as instruments for boosting economic growth. However, in the

beginning, the impact of international trade in other dimensions such as social, environment, etc. was

not much emphasized.

　 Global awareness of international trade and environmental concerns were beginning interested

at the United Nations Stockholm Conference on Development in 1972 and the Earth Summit in

* Ph. D. Candidate, Graduate School of International Development, Nagoya University. This paper was presented at The 12th

International Conference of the Japan Economic Policy Association (JEPA), held in Sapporo University, Japan, on 26―27 October 2013.

I am grateful to the moderator, commentators and audience for their helpful comments and suggestions.

** I would like to express my deepest gratitude to Professor OTSUBO Shigeru, and two anonymous referees for invaluable

comments; Professor Scott McDonald of Oxford Brooks University for GAMS version of the SAM extraction program; and IFPRI

for providing GAMS execution code for a Standard Computable General Equilibrium model. Any error in this study is the sole

responsibility of the author.


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1992 (Jayadevappa & Chhatre 2000). A concern on this topic raised rapidly in the 1990s. It was an

important issue widely discussed during the Uruguay round (GATT) and the Doha round of the World

Trade Organization (WTO). International trade has been questioned regarding its environmental

impacts, particularly in developing countries. With weak environmental policies, free trade may

promote growth that is amenable to pollution-intensive industries that destroy local environments. It

is a result of relocation of pollution-intensive production from tightly regulated countries to countries

with lax environmental regulations. This situation is called “Pollution Haven.”

　 Theoretically, the impact of trade liberalization on the environment can be decomposed as three

determinants; a scale effect, a technique effect, and a composition effect (Grossman & Krueger 1991;

Copeland & Taylor 1994; Dean 2002). In sum, the scale effect is measured as an increase in pollution

that would be generated if an economic activity enlarges. At the same time, economic growth raises

real income, it induces demand for a clean environment from consumers and encourages firms to

shift toward cleaner production processes. This is referred to as the technique effect and usually

contributes to positive benefits for environmental quality. The third effect, the composition effect, is

a change in the production structure. Specifically, it is a change in the share of output of each sector

in total production. Since each production sector pollutes differently, changing in the level of its

production will change the level of pollution. In other word, the composition effect is a change in share

of pollution-intensive production in overall domestic production. Composition effect is emphasized as

an important determinant of the relationship between international trade and environment by many

researchers. It can be an advantage or a detriment effect to the environment depending on how change

of production structure of each country after freer trade.

　 Composition effect involves with country’s degree of openness and its comparative advantage

(Managi, Hibiki, & Tsurumi 2008). The comparative advantage may be determined by the difference

in resource abundance (the capital-labour endowments or the KLE) or the asymmetry in the degree

of environmental regulation (the pollution haven hypothesis or the PHH). The KLE theory proposes

that comparative advantage of each country is different due to dissimilar in the resource endowment.

A country with capital-abundant will specialize in the capital-intensive product while the country with

labour abundant will specialize in the labour-intensive product. A capital intensive industry is typically

regarded as a dirty industry or a pollution-intensive industry in the viewpoint of environmentalist.

Therefore, if the KLE theory is applied, it can be forecasted that freer trade will induce developed

country (capital-abundant country) to specialize in pollution-intensive industry and lead developing

country (labour-abundant country) to specialize in less pollution-intensive industry.

　 For the latter one, the degree of environmental regulation is internalized in the cost of production

(i.e. pollution abatement cost). Then country has comparatively lax environmental standards have the

comparative advantage in pollution-intensive industry since lax environment regulation leads to lower

cost of production comparing with country with strict environmental policy, ceteris paribus (Grossman


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& Krueger 1991; Antweiler, Copeland, & Taylor 2001; Managi et al. 2008). With this knowledge,

environmental regulation is an important factor for freer trade. Freer trade may harm the environment

if there are no appropriate environmental policies put in place.

　 Overall, the net of these effects may be positive or negative. The technique effect may offset

negative impacts from the scale effect, but the composition effect can contribute to either negative or

positive effects and needs to be of concern to researchers and policymakers.

　 This study will analyse the impacts of trade reform on environmental quality of Thailand with

a focus on environmental policy. Trade reforms are postulated as the import tariff is zero for all

commodities. Results are expected to contribute benefits both in terms of verifying the relationship of

trade and environment and proposing appropriate policy for Thailand.

　 This paper is organized as follows. Section 1 presents background of this study including;

summarizes conceptual idea, revisits previous related studies, and provides background of trade and

environment in Thailand. Section 2 shows the methodology and data used in this study. Section 3

presents results and discussions of the study. Section 4 presents conclusions and policy implications.

The last section, section 5, presents limitations and suggestions for future studies.

1.2. Review of Related Literatures

　 The discussions on the linkage between environmental quality and trade have a long history, both

theoretically and empirically. Many theoretical concepts have been proposed but, among of them,

the popular ideas to debate on this concern are based on the KLE theory and the PHH, as mentioned

earlier. Grossman and Krueger (1991) developed a useful knowledge to explain this issue. They

decomposed effect of freer trade on the environment into three main effects; the scale, the composition

and the technique effects; and tested with available data. The finding was that the effect of trade on

pollution was determined by a difference in factor abundance, as said in the KLE theory. Copeland

and Taylor (1994) further developed the model that focusing on North-South trade. They pointed out

that the North (developed country) tended to specialize in cleaner goods after trade with the South

(developing country). Antweiler et al. (2001) introduced a comprehensive model that the three effects

were clarified. Cole and Elliott (2003) extended the idea of Antweiler et al. (2001) and proposed that

environmental regulation determines the composition effect.

　 A growing number of empirical works is increasing showing the evidence supporting both sides;

positive impacts and the negative impacts of international trade on the environment. For example,

studies of China (Dean 2002), Mexico (Jenkins 2003) and India (Mukhopadhyay & Chakraborty 2005)

found that trade liberalization is good for the environment, whereas studies of Argentina (Jenkins

2003), Brazil (Jenkins 2003), Vietnam (Jha & Mani 2006) and Nigeria (Feridun, Ayadi, & Balouga 2006)

showed that freer trade damages the environment.

　 Beghin et al. (1997) proposed an importance of a coordinating policy between trade and


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environmental reforms. Their statement is supported by plentiful empirical evidence (see O’Ryan et

al. (2005), Dessus and Bussolo (1998), Al-Amin et al. (2008)).

　 For the study on impact of international trade on environmental quality in Thailand, there is

only limited empirical evidence available. Mukhopadhyay (2006) proposed that trading with OECD

destroyed the environment of Thailand. Thailand increasingly exported dirty goods and imported clean

goods. Li (2005) simulated impacts of tariff reduction on the environment of Thailand. She found that

trade liberalization had a negative impact on the environment, but its effect was trivial. Energy taxes

were proposed to apply together to protect the environment.

　 Debates on previous literatures give knowledge that it remains no common conclusion on the

effects of trade on the environment. For instance, the impact of trade reform on the environment in

developing countries is varying across country and sometimes different from theoretical hypothesis.

Therefore, this topic remains important and debatable.

1.3. International trade and the Environment in Thailand

　 For Thailand, international trade has played an important role for a long history. During the national

second development plan (1967―1971), Thai government promoted import-substitution strategy as an

engine of economic growth. In 1980s, the Thai government implemented sets of export promotion

policies, for example, tax and tariff rebates. Also, Thailand joined several multilateral and bilateral

trade liberalization agreements. Series of export-led-growth measures and freer trade strategies

within the said period led to an impressive GDP growth.

Source: Ministry of commerce, Thailand

Figure 1　Thailand Export and Import Structures

　 The importance of international trade on Thai economy is confirmed by an increase of shares of

exports and imports in GDP. The share of exports and imports in GDP rise from about 30% in 1980s

to about 70% in 2000s1. Figure 1 shows that, In 1990s, agro-industry, light manufacturing and heavy

manufacturing are major export sectors. Thailand’s export is growing towards heavy manufacturing

sector. For an import, Thailand’s major import sector is heavy manufacturing especially machinery

products, but import of resource-based sector continuously expands from an increase in import of


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crude oil as an input of petroleum refinery. An expansion of heavy manufacturing sector may bring

about questions on its environmental impacts.

　 During that rapid growth period, the government policy mainly focused on raising national income

and accelerating economic growth. Environmental issue was not much underlined. In Thailand,

there are two main environmental laws including the enhancement and conservation of National

Environmental Quality Act, B. E. 2535, and Article 67 of the Thai Constitution. Under the first, the

Environmental Quality Board was established. The Environmental Quality Board has powers and

duties in submitting policy and governing agencies related to environmental quality management.

For the latter, Article 67 of the Thai Constitution stipulates that for large-scale development projects,

environmental impact assessments must be conducted before projects start. With these laws,

environmental standards are set such as water quality standard (2009), air quality and noise standards

(2007) and soil quality standard (2004).

　 Overall, environmental quality in Thailand is regulated by command and control measures, not

market-based instruments. However, the rapid growth of environmental awareness both on a global

community and national level raises pressure to Thailand. Thailand desires to move its development

goal from economic growth toward sustainable development. Sustainable development has been

promoted as a development goal since the 9th National Economic and Social Development plan

(2002―2009), but no practical measures regarding environmental quality have been implemented.

The 11th National Economic and Social Development plan (2012―2016) highlights the need for the

country to transit to a green economy and a society that is environmentally friendly. A key measure

is encouraging green production and consumption that leads to Greenhouse Gas (GHG) emission

reduction. In order to reach this goal, Thailand is currently working on the Financial Measures for

Environment Act2. Under this law, emission charges for some pollution such as wastewater and air

pollution will be levied.

2. Methodology

　 This study has two steps of analysis. In the first step, the Computable General Equilibrium (CGE)

analysis was applied to simulate impacts of trade reform and other four scenarios. The second step

utilized results from CGE to calculate environmental impacts that are defined as levels of Greenhouse

Gas (GHG) emission.

2.1. A CGE Model

　 In order to measure the impact of trade reform on Thailand’s environment, at the start, this study

used the Standard Computable General Equilibrium model of the International Food Policy Research

Institute (IFPRI) by Lofgren et al. (2001). This model is a comparative static general equilibrium


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model with perfect competition market and constant return to scale (CRTS) technology assumption.

　 The model includes the following elements: production (activities and commodities), factor input,

institutions (household, government, and enterprise), and savings-investments (S-I), tax elements

and the rest of the world. A producer is assumed to maximize profit by choosing a combination of

intermediate inputs and primary factors. The substitution among intermediate inputs is assumed to

follow the Leontief specification while primary factors can be substituted with Constant Elasticity

of Substitution. Model closures for macroeconomic balances selected by this study are flexible

government savings and the exchange rate, fixed direct tax rate and foreign savings, and investment-

driven closure. These closures are chosen based on the assumption that the Thai economy is a small

and open economy. The Consumer Price Index (CPI) is chosen to be numeraire.

　 To calibrate the model, the General Algebraic Modeling System (GAMS), a software for

mathematical programming and optimization, is used with the Social Accounting Matrix (SAM) of

Thailand extracted from the database of the Global Trade Analysis Project (GTAP) version 8, following

the method of McDonald and Thierfelder (2004). Thailand’s data from GTAP 8 is settled based on

Thailand’s 2005 Input-Output table of the National Economic and Social Development Board (NESDB)

and Macroeconomic data of 2004 and 2007.

　 Raw data acquired from this method was from a Global SAM which required additional treatment

to reduce it to Thailand’s SAM, which its elements reconcile with the IFPRI’s CGE model, a pool of

income in the GTAP model (payment to/from “Regional Household,”) is disaggregated. An “Enterprise”

institution is founded. A transfer between domestic institutions is established by referring to transfer

to total income proportion from Thailand’s SAM 1998 by Li (2002).

　 Production factors in this SAM are labor, capital, natural resources, and land. Labor is classified

by skill types and sectors. Labor is classified as unskilled agricultural labor, skilled agricultural labor,

unskilled non-agricultural labor, and skilled non-agricultural labor. Capital is classified by sectors. So

it is divided by non-agricultural capital and agricultural capital. An assumption for factor market is

that all types of labors are fully employed and mobile, but capital, natural resources and land are fully

employed and activity-specific. The set of elasticity used in the model is taken from GTAP8.

　 There are 36 sectors in Thailand’s SAM which consists of four primary agricultural sectors, six

resource-based sectors, four agro-industry sectors, four light manufacturing sectors, eight heavy

manufacturing sectors, three utility sectors, six service sectors, and a transportation sector.

　 The simulation scenarios are designed as follows. Trade reform is defined as import tariff is set

to be zero. Environmental policy schemes are designed by referring previous literatures and an on-

progress Thailand’s Financial Measures for Environment Act3. I set environmental policy as two

scenarios, lax environmental tax with 500 Thai Baht per ton of carbon-dioxide equivalent4 (tCo2eq)

of emission and strict environmental tax with 2,500 Thai Baht per tCo2eq of emission. The base

year reveals the benchmark scenario in the absence of trade reforms and any environmental policies.


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There are five scenarios in this study. Scenario 1 is a simulation of trade reform policy implemented

without any other complimentary environmental policy. Scenario 2 is a simulation of lax environmental

tax without trade reform. Scenario 3 is a simulation of strict environmental tax without trade reform.

Scenario 4 addresses trade reforms with lax environmental tax simultaneously. Scenario 5 considers

both trade reform and strict environmental tax. Simulation scenarios are concluded in Table 1.

Table 1　Simulation Design

Without Environmental tax Lax Environmental Tax Strict Environmental Tax

Without Trade reform Base Case Scenario 2 Scenario 3

With Trade reform Scenario 1 Scenario 4 Scenario 5

Source: Author

　 The CGE model will be calibrated for simulations under all the scenarios, and their results will be

compared with those in the base case. In theory, after the trade reform, domestic prices of imported

goods decline. For demand side, demand for imported goods increases while demand for domestic

goods5 decreases. The size of the change depends on their marginal rate of substitution. For supply

side, tariff removal leads to a reduction in production costs, and then supply of domestic goods

would increase. A total change in domestic production depends on the net effect of these demand

and supply impacts. It is often the case that a sufficient expansion in exports due to improved price

competitiveness in those expanding sectors is necessary to compensate for the losses in production

made in import competing sectors. As a result of all above adjustments, a production structure,

imports and exports of the country will also change. A change in production structure leads to a

change in returns to production factors, household income and consumption. Finally, Gross Domestic

Production (GDP) will change as well. For the larger positive impact of trade reform, the more flexible

factor markets and resource shifts from shrinking to expanding sectors are called for. Assumptions

on the marginal rates of substitution between domestic and imported products and rigidities in factor

mobility are thus crucial among other parameters.

2.2. Environmental Analysis

　 Results of the CGE analysis will be used to calculate environmental impacts, which proxies by

level of Green House Gas (GHG) emission. GHG is a prominent indicator of air pollution. Other

types of pollution such as soil degradation, land degradation and wastewater are not considered in this

study due to a lack of data. GHG emission levels in all scenarios will be figured with respect to GHG

sectoral emission intensity conducted by Limmeechokchai and Suksuntornsiri (2007).6 Three types

of GHG, carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O), following the revised 1996

Intergovernmental Panel on Climate Change (IPCC) guidelines, and energy use are used to calculate


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GHG intensity.

　 To analyze environmental impacts of trade reform, the scale effects and the composition effects will

be calculated by method presented by Strutt and Anderson (2000). Unfortunately, due to a limitation of

data, a technology effects7 associated with technology advancement will not be considered. I assume

that producers cannot upgrade their technology in the short-run. Therefore, this study will modify the

method of Strutt and Anderson (2000) with major concerns on the scale and composition effects. Total

change in GHG emission (E) is the summation of changes in emission from each sector (Ej).

E＝∑36

j=1

Ej

Where Ej＝Sj＋Cj

j denotes the production sector in the model. Sj and Cj represent the scale effects (SE) and the

composition effects (CE) respectively. The overall emission level of each sector is the sum of scale

and composition effects. Scale and composition effects are calculated as follows:

Sj＝θj＊g＊Xj

Cj＝θj＊(xj－g)＊Xj

Scale effect of sector j is computed by the product of the initial output level of sector j (Xj) and emission

intensity (θj) and the overall growth rate of real output (g). xj stands for the proportional change of

output in each sector. Scale effect indicates a change in emission from a change in economic activity

due to trade reform with no concern for any transformation in production structure. Composition

effect, by contrast, measures the effect from production structure change while maintaining output

level at the same level as before trade reform.

3. Results of the Study

　 This section discusses results from the CGE simulation and environmental analysis. It can be

divided into four sub-sections. Section 3.1 reviews results from scenario 1. Section 3.2 explains

results from scenario 2 and 3. Findings from scenario 4 and 5 are discussed in section 3.3. In each

section, the discussion includes impacts on macroeconomic variables (Table 2), sectoral impacts (Table

3) and GHG emissions (Table 4). Later I summarize all results in section 3.4.

3.1. Impacts of Trade Reform (Scenario 1)

　 The first discussion addresses impacts of trade reform without any environmental policies enforced.

Before looking at impacts on the environment, this study starts with a discussion on Thailand tariff

structure before trade reform (see Appendix). Tariff structure is calculated based on Thailand’s SAM.

In general, Thailand’s manufacturing sectors are protected by import tariff. I find that manufacturing


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Table 2　Macroeconomic Impacts

BASE

(Bill. Baht)

Scenario 1

(%Ch.)

Scenario 2

(%Ch.)

Scenario 3

(%Ch.)

Scenario4

(%Ch.)

Scenario 5

(%Ch.)

GDP 9829.61 1.14 －0.05 －2.61 1.07 －1.73

Real GDP 9829.61 0.32 －0.10 －3.12 0.22 －2.86

Absorption 8643.02 0.67 －0.16 －3.76 0.48 －3.37

Private Con. 4998.14 0.67 －0.21 －7.15 0.48 －6.50

Fixed Inv. 2477.53 －0.67 1.30 9.88 0.57 8.53

Gov. Con. 1167.35 3.46 －3.06 －18.17 0.32 －15.17

Exports 7132.30 7.29 0.11 3.06 7.40 10.31

Imports －5945.71 7.82 －0.02 2.52 7.81 10.34

Net Ind. Tax 882.51 －36.11 57.94 316.22 22.95 284.53

Price Index 1.00 1.07 0.31 5.05 1.34 5.92

Welfare 0.55 －0.21 －6.68 0.35 －6.14

Source: Simulation Results

Table 3　Sectoral Outputs

SectorBASE

(Bill. Baht)Scenario 1

(%Ch.)Scenario 2

(%Ch.)Scenario 3

(%Ch.)Scenario 4

(%Ch.)Scenario 5

(%Ch.)

Total 22727.57 0.04 －0.44 －3.42 －0.40 －3.32

Primary Agriculture

Crops 333.09 －0.10 －0.01 0.47 －0.10 0.38

Vegetable and Fruit 372.89 0.15 0.06 0.14 0.21 0.29

Sugar cane 43.30 0.96 －0.39 －2.85 0.59 －1.81

Livestocks 201.89 －0.36 －0.07 －1.08 －0.43 －1.46

Resource-based

Forestry 45.47 －2.21 0.84 4.81 －1.32 2.89

Fishing 177.41 －0.13 －0.03 －0.47 －0.15 －0.57

Coal 21.76 －0.05 －0.11 －2.42 －0.17 －2.60

Oil 194.32 －0.01 0.15 1.14 0.13 1.06

Gas 69.97 0.01 0.13 0.67 0.14 0.62

Mining 145.87 －0.06 －0.22 －2.80 －0.29 －2.92

Agro-industry

Meat Products 223.25 －0.73 0.11 －0.10 －0.62 －0.81

Food Products 1091.63 1.83 －0.39 －2.31 1.48 －0.37

Dairy products 73.68 －2.89 －0.27 －3.48 －3.20 －6.71

Beverages and Tobacco 227.46 －6.68 0.43 0.01 －6.30 －6.81

Light Manufacturing

Textile and Apparel 890.85 0.18 －0.41 －4.78 －0.18 －4.43

Leather products 191.19 －0.32 1.04 7.74 0.84 8.38

Wood products 223.07 －0.38 1.72 11.55 1.38 11.32

Paper and publishing 262.07 －0.85 －0.31 －2.87 －1.19 －4.09

Heavy Manufacturing

Petroleum and coal 1127.90 －1.53 －2.49 －15.21 －4.03 －16.65


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n.e.c.8 sector has highest tariff, follow by beverage and tobacco sector. Primary agricultural and agro-

industry sectors are also protected by tariff to some extent.

　 Impacts of trade reform on the overall economy are presented in Table 2. CGE results show that

trade reform generates an increase in exports, imports and GDP. GDP increases by 1.14% from the

base level due to a large expansion in trade volume, 7.29% in exports and 7.82% in imports. The

SectorBASE

(Bill. Baht)Scenario 1

(%Ch.)Scenario 2

(%Ch.)Scenario 3

(%Ch.)Scenario 4

(%Ch.)Scenario 5

(%Ch.)

Chemical, rubber, plastic 1661.95 0.47 －0.39 －1.85 0.13 －1.13

Non-Metal Product 374.26 －2.23 －5.06 －40.50 －7.52 －44.34

Metal Product 747.68 0.37 －6.00 －42.53 －5.57 －41.74

Transport equipment 1429.49 －1.48 －0.13 0.94 －1.56 －0.13

Electronic equipment 1767.99 2.56 0.13 2.95 2.80 6.21

Machinery 1514.35 1.70 1.02 6.22 2.82 8.70

Manufacturing n.c.e. 445.47 －10.47 0.22 2.27 －10.42 －9.34

Utilities

Electricity 464.42 0.04 －2.60 －27.65 －2.52 －27.37

Gas manufac. 278.16 0.00 －2.01 －21.93 －1.98 －21.75

Water 57.13 －0.06 －0.28 －5.42 －0.34 －5.46

Transportation 1292.56 2.02 －4.12 －22.33 －2.20 －20.81

Services

Construction 860.59 0.24 －0.25 －1.78 0.00 －1.44

Trade&Financial Service 3861.40 －0.16 1.15 5.74 0.96 5.31

Communication 298.05 －0.21 0.75 3.08 0.51 2.67

Recreation 429.83 0.55 0.32 －1.40 0.89 －0.83

Public Services 1182.93 －0.13 0.60 3.06 0.46 2.81

Dwellings 144.26 －0.03 0.04 0.16 0.02 0.12

Source: Simulation Results

Table 4　GHG Emissions

Base Scenario 1 (%Ch.) Scenario 2 (%Ch.) Scenario 3 (%Ch.) Scenario 4 (%Ch.) Scenario 5 (%Ch.)

(MtCO2) Total SE CE Total SE CE Total SE CE Total SE CE Total SE CE

Total Economy 1039.08 0.09 0.04 0.06 －1.74 －0.44 －1.29 －13.06 －3.42 －9.64 －1.65 －0.40 －1.25 －13.00 －3.32 －9.68

Primary Agriculture 14.82 －0.05 0.04 －0.09 －0.01 －0.44 0.43 －0.22 －3.42 3.19 －0.07 －0.40 0.33 －0.28 －3.32 3.04

Resource-Based 30.13 －0.09 0.04 －0.13 －0.03 －0.44 0.42 －0.74 －3.42 2.68 －0.13 －0.40 0.27 －0.86 －3.32 2.46

Agro-Industry 53.84 0.51 0.04 0.48 －0.25 －0.44 0.20 －1.91 －3.42 1.51 0.28 －0.40 0.68 －1.34 －3.32 1.97

Light Manufacturing 66.65 －0.12 0.04 －0.16 －0.08 －0.44 0.36 －1.93 －3.42 1.48 －0.17 －0.40 0.23 －1.93 －3.32 1.39

Heavy Manufacturing 442.16 －0.44 0.04 －0.47 －2.19 －0.44 －1.74 －15.50 －3.42 －12.09 －2.62 －0.40 －2.22 －15.93 －3.32 －12.61

Utilities 144.73 0.04 0.04 0.00 －2.52 －0.44 －2.08 －26.95 －3.42 －23.53 －2.46 －0.40 －2.06 －26.69 －3.32 －23.37

Transportation 129.53 2.02 0.04 1.98 －4.12 －0.44 －3.68 －22.33 －3.42 －18.91 －2.20 －0.40 －1.80 －20.81 －3.32 －17.49

Services 157.22 0.04 0.04 0.00 0.51 －0.44 0.96 2.12 －3.42 5.54 0.54 －0.40 0.94 2.07 －3.32 5.39

Polluting industry 644.39 0.27 0.04 0.23 －2.86 －0.44 －2.41 －21.40 －3.42 －17.98 －2.61 －0.40 －2.21 －21.28 －3.32 －17.96

Non-Polluting industry 394.69 －0.20 0.04 －0.23 0.09 －0.44 0.54 0.55 －3.42 3.97 －0.08 －0.40 0.32 0.51 －3.32 3.83

Source: Author’s calculation from simulation Results


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result follows basic international trade theory: when tariff, which is a distortion, is removed, resource

allocation will be more efficient. Welfare, measured by equivalent variation (EV)9, also increases.

　 After trade reform, sectors can be “winners” or “losers”. In this study, I consider “winners” as

sectors with an increase in their production (or production expansion). “Losers” are sectors that

contract after trade reform. Results of trade reform at sectoral level are presented in Table 3. The

results reveal that most of the winners are in an industrial side (such as food manufacturing, the

electronic equipment and the machinery sector). Transportation sector also enlarges. As mention

earlier, a net change in sector’s production depends on changes in demand and supply of imports and

domestic goods, which rely on several factors. For example, the expansion of a food industry is from

an increase in supply from a lower cost of production. Intermediate input prices used in food industry

decline after trade reform.10 Therefore, there is an increase in production in this sector, and this

situation dominates sector’s contraction from an increase in import goods. For the losing sectors,

domestic production in sectors carried high tariffs before trade reform (such as beverage and tobacco)

declines since it loose trade protection.

　 For environmental impacts, as presented in Table 4, overall GHG emission increased after trade

reform (0.09%). A scale effect (SE) shows an increase of GHG emission deriving from economic

expansion after trade equals 0.04%. A composition effect (CE) of relative expansion of polluting

industries also shows a positive number (0.23%). It can be explained that, after trade reform,

Thailand’s environmental quality degraded, since an increase in GHG emission comes from polluting

industries.11 In other words, the production structure of Thailand after trade reform shifted towards

polluting industries.

　 Note that the main source of increase in GHG emission is the transportation sector. Trade reforms

enlarge economic activities that lead to an increase in the demand for transportation service. With

GHG emission intensity, the transport sector is considered as a polluting industry. Its GHG emission

intensity is 100.21 tCo2eq, while an average emission intensity of overall sectors is 45.43 tCo2eq.

However, to receive benefits from economic growth, an increase in GHG emission from a widening of

the transportation sector may be unavoidable since it closely relates with an expansion of the economy.

3.2. Impacts of Environmental Tax (Scenario 2 and 3)

　 This section discusses results of scenarios 2 and 3 that are environmental taxation without trade

reform. In scenario 2, each sector is imposed lax environmental tax which is equal to 500 Baht/tCo2eq.

This tax is collected based on the emission intensity of each sector.13 Then sector that emits at high

intensity of GHG is enforced high tax respectively, for example, 14.42% environmental tax rate for

the electricity sector, 10.39% for non-metal product sector and 5% for a transportation sector (See

Appendix).

　 When lax environmental policy is implemented (Scenario 2), GDP decreases by a small amount, and


74

welfare also declines (see Table 2). These findings are predictable. Environmental tax is a distortion

that increases production cost and cause economic contraction. At sectoral level (Table 3), since the

environmental tax rate is connected to levels of GHG emission, sectors with high intensity of emission

are confronted with high tax rate compared to other sectors and in turn transmit into their production

cost that finally result in a decline in production. For example, the transportation sector, metal and

non-metal sectors shrink around 5%. Conversely, sectors that emit low intensity of GHG such as

forestry and service sectors expanded. These changes in sectoral outputs lead to a change in overall

GHG emission of Thailand. In sum, the GHG emission (Table 4) decreased 1.74% from the level in the

baseline. The result also shows a contraction in the polluting industry (CE equal to －2.41%) and an

expansion in non-polluting industry (CE equal to 0.54%).

　 For strict environmental tax (Scenario 3), each sector is imposed strict environmental tax which

is equal to 2500 Baht/tCo2eq. From Table 2, it is shown GDP significantly drops by 2.61%. Welfare

decreases about 6.68%. Strict environmental tax leads to noticeable economic contraction because it

puts very high pressure on production costs. For sectoral impacts, as shown in Table 3, sectors with

high environmental tax rate contract to a large extent. For instance, metal and non-metal sectors

diminish approximately 40%. Transportation, electricity, and gas manufacturing sectors shrink to about

20%.

　 However, strict environmental tax shows a significant success in GHG emission control. GHG

emission declines notably by 13.06% (Table 4), which is the greatest reduction compared to other

scenarios. This GHG reduction comes from a tightening in economic activity (scale effect), which

leads to －3.42% in GHG emission, and a decrease of GHG level results in a change in production

structure toward non-polluting industry (composition effect), which equal to －9.64% reduction in

GHG emission. In summary, it shows that strict environmental policy succeeds in promoting non-

polluting sectors although an economy will suffer a contraction.

3.3. Impacts of Trade Reform and Environmental Tax (Scenario 4 and 5)

　 These experiments aim to explore mixed policy between trade reform and environmental tax.

Scenario 4 and 5 examine impacts of trade reform on the environment when environmental tax is

introduced. Scenario 4 is a combination of trade reform and lax environmental tax. Scenario 5 is a

coordination of trade reform and strict environmental tax.

　 Starting with scenario 4, when lax environmental tax is enforced with trade reform, macroeconomic

index (Table 2) of this scenario shows similar effects to Scenario 1. GDP increases by 1.07% that

indicates benefits from freer trade dominate economic contraction from environmental regulations.

Trade volume expands, and welfare also increases. However, there is a different in production

structure (Table 3). In contrast to scenario 1, the transportation sector cannot be considered a “winner”

because the sector contracts. It refer that gains from tariff removal are offset by rising costs associated


75

with environmental policy.

　 As a result, for environmental impacts, the GHG emission declines after this combined policy

(scenario 4) is introduced. GHG emission declines by 1.65% compared to that in the baseline scenario

(see Table 4). Both scale and composition effects show negative sign that reveals that GHG emission

decreases. Accordingly, the level of emission in the economy does not go as high as scenario 1.

Compared with scenario 1 where trade reform generates pollution, the results show that such pollution

can be reduced if environmental regulation is put in place.

　 An increase in GDP and a reduction in GHG emission as outcomes of the combination policy

make the policy desirable. The combined policy lets the country simultaneously enjoy benefits from

economic growth while preserving environmental quality.

　 When strict environmental tax is introduced together with trade reform (Scenario 5), the gain from

trade is superseded by the contraction of the economy from strict environmental tax. As in Table 2,

GDP falls by 1.73%, and welfare also decreases. For environmental impact (Table 4), overall GHG

emission greatly goes down (13.00%). Similar to scenario 3, scenario 5 is effective for GHG mitigation

but raises a question on its economic impact.

　 These two scenarios highlight the importance of the degree of environmental regulation as a

determinant of the benefits from international trade. Strong environmental policy will be suitable for

protecting the local environment, but the country cannot utilize benefits from trade liberalization.

　 Also note that the degree of the initial tariff is important. If an initial tariff is small (country’s trade

policy is close to free trade), environmental policy will play a crucial role in changes in production

structure, economic and environmental impacts.

3.4. Discussion and Summary of the Results

　 According to the theoretical discussion, international trade brings about an expansion of the

economy, in particular, economic growth. Still, the country may have to accept environmental

degradation at the same time. A summary of the relationship between GDP (as a proxy of economic

impact) and GHG emission (as a proxy of environmental effect) is shown in Table 5.


76

Table 5　Summary of Total GHG Emission and GDP under Different Policy Schemes

GDP

Billion Baht (%Ch.)

Real GDP

Billion Baht (%Ch.)

GHG Emission

MtCo2eq (%Ch.)

Base 9829.61 9829.61 1039.08

Scenario1 9942.00 9861.43 1040.03

(1.14) (0.32) (0.09)

Scenario2 9824.64 9819.80 1021.03

－(0.05) －(0.10) －(1.74)

Scenario3 9572.94 9523.27 903.38

－ (2.61) － (3.12) － (13.06)

Scenario4 9935.09 9851.47 1021.92

(1.07) (0.22) － (1.65)

Scenario5 9659.30 9549.01 903.99

－ (1.73) － (2.86) － (13.00)

Source: Author

　 The result confirms the above statement of the linkage between trade and the environment.

Thailand receives economic benefits from freer trade while it has to accept environmental degradation.

When tariffs are removed, GHG emission increases from 1039.08 Million tCo2eq to 1040.03 Million

tCo2eq. An increase in GHG emission is an environmental cost of trade reform. However, when

environmental policy is put in place, the relationship between trade and environmental quality is not

necessarily negative. In this study, scenario 4 (a combination of trade reform and lax environmental

tax) is preferable. It increases GDP by 1.07% from the baseline and reduces GHG emission 1.65% at

the same time.

4. Conclusion and Policy Implication

　 This section concludes with the results of the study. There are five important issues that will be

addressed.

　 First, for Thailand, trade reform itself is not good for the environment. It shifts economic structure

toward polluting industry. When it is implemented without any other complementary environmental

policy, Thailand will gain benefits from an increase in GDP but have to accept more pollution due to

rising GHG emissions. Without any environmental protection measure, Thailand may be a pollution

haven. Hence, environmental regulations should be concerned with protection against environmental

degradation.

　 Second, the results show that there exists an appropriate policy from which Thailand can utilize

benefits from trade without environmental damage. In this study, the coordinating policy between trade

reform and lax environmental tax (scenario 4) leads to that consequence. Policymakers can ensure


77

Thailand, by introducing this policy, can pursue development without environmental degradation.

　 Third, the degree of regulation should be emphasized. A combined policy of environmental tax

and trade reform should be done carefully. Too strict an environmental tax may lead to economic

contraction.

　 Fourth, as the results show, trade reform can be an instrument for enhancing economic growth,

it implies that if Thailand is obligated to perform environmental tax in the future (for instance,

environmental measures forced by the United Nations Framework Convention on Climate Change

[UNFCCC]), the country should enforce it together with trade reform policy. Mixed policy will be

more beneficial to the economy than enforcing environmental tax alone.

　 Fifth, the results show that the sector that contributes most to GHG emission after trade reform is

the transportation sector. However, transportation service is linked to other economic activities. Tax

policy for this sector should be introduced with this consideration. Other policies that do not obstruct

its activity but can reduce GHG emissions, such as renewable energy subsidy, may be implemented.

5. Limitations and Suggestions for Further Research

　 A limitation of this study mostly derives from the limitation of data and the difficulty of structuring

the model. Firstly, the model is conducted under several assumptions. Some assumptions of the

model may not well explain the real situation, such as perfect competition in the goods market and

full employment condition on the factor market. These assumptions should be modified in the future

research. Besides, some key assumptions need to be more considered. The first concern is the

Leontief specification in utilizing intermediate inputs that do not allow substitution among input uses

when their relative prices change. So producer cannot substitute between polluting and non-polluting

inputs. The second concern is the consumption pattern of institutions does not change after the price

of goods and their income change. This assumption may differ from economic theory that consumers

tend to demand environmental-friendly goods when their income increases. The third concern is

the technology changes which should be contained in the model. This limitation may lead to a biased

result towards negative effects. Results of environmental impacts in this study may overestimate.

　 Another limitation is a limitation of the environmental data. This study cannot analyze the impact

of trade on other types of pollution, such as water and soil. In reality, these types of pollution affect the

standard of living, health, and welfare and should be emphasized.

　 Finally, to contribute more knowledge, a study on ecological footprint should be addressed in the

future study. International trade can be identified by nation’s ecological footprint, which results in

lower emission and natural resource use at the global level.


78

Notes

1 Ministry of Commerce (2014)

2 In Financial Measures for Environment Act (On progress), an emission charge is expected to be 2,500 Baht/ton

of air pollution (75$/year)

3 Data as at July 2014

4 A carbon dioxide equivalent is a metric measure used to compare the emissions from various greenhouse gases

on the basis of their global-warming potential (GWP), by converting amounts of other gases to the equivalent

amount of carbon dioxide with the same global warming potential (European Union, 2013)

5 Domestic goods mean domestically produced goods, which then can be sold locally or export.

6 GHG intensity is calculated for final consumptions. See Limmeechokchai and Suksuntornsiri (2007b)

7 “Technology effect” defined in the model of Strutt and Anderson (2000) is closely to the term “Technique effect”

that mentioned in Grossman & Krueger (1991), Copeland, & Taylor (1994), Antweiler et al. (2001). Technology

effect focuses on environmental improvement from transfer of environmental friendly technology after freer trade

while technique effect emphasizes on environmental improvement from rising demand for environmental standard

as a result of an increase in income.

8 Manufacturing n.e.c. includes; scientific equipment, photographic & optical goods, watches and clocks, jewelry &

related articles, recreational and athletic equipment, etc.

9 A change in welfare is measured by a percentage change in equivalent variation from consumption value at the

base case.

10 Main inputs used in food product sector are from sectors following; dairy products (23.45%), food product

(13.07%), livestock (8.80%). Prices of goods of these sector change －3.12%, －3.24%, －1.90%, respectively. Data

is available upon request.

11 In this study, polluting industry is defined that an industry that its emission intensity is higher than average.

Polluting industries include fishing, mining, textile and apparel, paper and publishing, chemical rubber and plastic,

non-metal product, metal product, electricity, construction, transportation.

12 Data of sectoral emission is available upon request.

13 Environmental tax is converted as an ad-valorem tax so as to include it in the model. See McDougall (1993) and

Wattanakuljarus (2011) for more details.

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SectorImport Tariff

Rate

GHG Intensity

(TonCo2/MB)

Lax Environmental

Tax rate

(at 500 B/tCo2eq)

Strict Environmental

Tax rate

(at 2500 B/tCo2eq)

Primary AgricultureCrops 10.87 13.64 0.68 3.41Vegetable and Fruit 15.09 14.25 0.71 3.56Sugar cane 0.00 10.87 0.54 2.72Livestocks 4.60 22.27 1.11 5.57Resource-basedForestry 4.75 8.16 0.41 2.04Fishing 6.86 60.42 3.02 15.11Coal 0.79 40.19 2.01 10.05Oil 0.00 33.71 1.69 8.43Gas 0.01 33.71 1.69 8.43Mining 1.00 63.42 3.17 15.86Agro-industryMeat Products 15.60 25.55 1.28 6.39Food Products 10.72 36.95 1.85 9.24Dairy products 9.33 35.36 1.77 8.84Beverages and Tobacco 42.60 22.84 1.14 5.71Light ManufacturingTextile and Apparel 9.49 46.60 2.33 11.65Leather products 13.73 30.05 1.50 7.51Wood products 8.70 25.10 1.26 6.28Paper and publishing 4.88 52.61 2.63 13.15Heavy ManufacturingPetroleum and coal 7.84 28.48 1.42 7.12Chemical, rubber, plastic 8.63 54.27 2.71 13.57Non-Metal Product 12.19 207.79 10.39 51.95Metal Product 4.04 110.41 5.52 27.60Transport equipment 18.60 35.28 1.76 8.82Electronic equipment 1.75 34.24 1.71 8.56Machinery 5.10 20.85 1.04 5.21Manufacturing n.c.e. 55.26 38.10 1.91 9.53UtilitiesElectricity 288.41 14.42 72.10Gas manufac. 30.26 1.51 7.57Water 41.45 2.07 10.36Transportation 100.21 5.01 25.05ServicesConstruction 64.06 3.20 16.01Trade&Financial Service 17.25 0.86 4.31Communication 8.46 0.42 2.12Recreation 29.59 1.48 7.40Public Services 16.41 0.82 4.10Dwellings 5.86 0.29 1.47

Source: Author calculates import tariff from SAM. Emission intensity is from Limmeechokchai and Suksuntornsiri (2007b). Environmental tax is calculated by author.

APPENDIXTariff, Emission Intensity and Environmental Tax Rate

Documents

Rethinking the Relationship between International Trade ... · 9/25/2014 · Forum of International Development Studies. 45―4 (Mar. 2015) 63 Rethinking the Relationship between